Create an environment where SEND staff can do quality work

Economists had only debated the nature and relationship between financial institutions such as Central Banks, deposit money banks, brokerage houses and mutual funds use varieties of financial institutions to facilitate trade in goods and services. They channel resources from the savers to the investors, providing payment services, mobilizing savings, allocating credit, allocating resources and the management of funds. This is a way that promotes growth and industrial development (Odi, 2013; Greenwood & Jovanovich, 1990; Bencivenga & Smith, 1991).

The banking sector through provision of reliable payment system, mobilization of the savings, allocation of credit and diversification of borrowing roles enhance economic activities and promote industrial development. Allocation of financial institutions, facilitate its scope, nature of saving and the investment, which has positive impact on economic growth and industrial development. Various theories have been put forward by different economists in trying to explain the contribution of the banks’ credit and the advance to growth (GDP) in the individual sector of the economy.

Werner (2005) notes that the central argument is a dichotomous equation of exchange distinguishing between money used for GDP- transactions (determining

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nominal GDP) and money used for non-GDP transactions (determining the value of asset transactions). growth requires increased transactions that are part of GDP, which in turn requires a larger amount of money to be used for such transactions.

The amount of money used for transactions can only rise if banks create more credit.

This expands the money supply and it suggests that accurate way to measure this money is by bank credit. It can be disaggregated into credit for GDP transactions (CR) and credit for non-GDP (i.e. asset) transactions (CF). The former drives nominal GDP and the latter asset transaction values. Under further conditions, they determine consumer and asset prices:

C= CR+ CF

∆(CRVR)=∆ (PR Y)

∆ (CF VF)=∆ (PFQ F)

So the effect of bank credit depends on its quantity and quality- the latter defined by whether it is used for unproductive transactions (credit for consumption or asset transactions, producing unsustainable consumer or asset inflation, respectively) or productive transactions (delivering non-inflationary growth). Credit used for productive transactions aims at income growth and is sustainable; credit for asset transactions aims at capital gains and is unsustainable. When credit creation slows after an asset bubble driven by credit for asset transactions, the ensuing fall in asset prices capital losses and non- performing loans can easily trigger a banking crisis

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(banks have less than 10 percent of equity; a drop of their asset values by little more than 10 percent implies bank insolvency).

A monetarist like Friedman, in Articles ng (2014) emphasizes money supply as the key factor affecting the wellbeing of the economy. Thus in order to promote steady growth rate, the money supply should grow at a fixed rate instead of being regulated and altered by the monetary authority (ies). Keynes, in Article ng (2014) on the other hand, maintains that monetary policy alone is ineffective in stimulating economic activities because monetary policy works through indirect interest rate mechanism. Friedman equally argues that since money supply is substitutive not just for bonds but also for many goods and services, changes in money supply will therefore have both direct and indirect effects on spending and investment respectively.

Waheed (2009) analyzes that to improve the wellbeing of rural poor, micro finance is proposed to be primarily essential for investment in rural productive activities. The study concluded that per capita credit to non-poor was better than per capital credit to poor farmer. More credit was largely taken by non-poor and the poor have little access to micro credits.

To sum, Oachan (1977) emphasizes the credit need of Thai farmers, insisted that there is need to estimate the current and future credit needs for both short - and long-term purposes. He said that any sound policy requires reliable estimates and

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information regarding the nature and magnitude of the needs under alternative conditions.

2.2.2: Theories of Economic Growth and Production: There are numerous growth models in literature. However, there is no consensus as to which model will achieve the best success. The achievement of sustainable growth requires minimum levels of skills and literacy on the part of the population, a shift from personal or family organization to large scale unit (Nnanna, 2014). The growth models relevant for this study are Neo- Classical Model of Growth and Endogenous Growth Theory.

This is because they explain the situation in developing economies such as Nigeria, Ghana, Cameroun, etc.

2.2.2.1 Neo- Classical Model of Growth: The Neo- classical Model of Growth was first devised by Robert Solow (1956). The model believes that a sustainable increase in capital investment increases the growth rate only temporarily. This is because the ratio of capital to labour goes up (there is more capital available for each worker to use) but the marginal product of additional units of capital is assumed to decline and the economy eventually moves back to a long- term growth path, with real GDP growing at the same rate as the workforce plus a factor to reflect improving

“productivity”. A “steady- state growth path” is reached when output, capital and labour are all growing at the same rate, so output per worker and capital per worker are constant. Neo-Classical economists believe that to raise an economy’s long term trend rate of growth requires an increase in the labour supply and an improvement

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in the productivity of labour and capital. Differences in the rate of technological change are said to explain much of the variation in economic growth between developed countries. The Neo- Classical model treats productivity improvements as an exogenous variable meaning that productivity is assumed to be independent of capital investment (IMF, 2001).

Nnanna, Englama, & Odoko (2004), report, based on Solow’s analysis of the American data from 1909 to 1949, showed that 87.5% of economic growth within the period was attributed to technological change and 12.5% to the increased use of capital. The result of the growth model was that financial institutions had only minor influence on the rate of investment in physical capital and the changes in investment are viewed as having only minor effects on economic growth.

2.2.2.2 Endogenous Growth Theory: Endogenous Growth Theory or new growth theory was developed in the 1980’s by Romer Lucas & Rebelo, among other economists as a response to critics of the neo- classical growth model. The endogenous growth theory holds that policy measures can have an impact on the long-run growth of an economy (Sparks, 2014). The growth model is one in which the long-run growth rate is determined by variables within the model, not an exogenous rate of technological progress as in a neo- classical growth model.

Jhingan (2006) explains that the endogenous growth model emphasizes technical progress resulting from the rate of investment, the size of the capital stock of human capital.

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In an endogenous growth model, Nnanna, Englama & Odoko (2004) observed that financial development can affect growth in three ways which are raising the efficiency of financial intermediation, increasing the social marginal productivity of capital and influencing the private savings rate. This means that a financial institution can affect economic growth by efficiently carrying out its functions, among which is the provision of credit.

In a Cobb- Douglas production function, Were, Nzomoi & Rutto (2012) expressed Qit= A^λ K^αit L^βit, where Qit = real output for industry i at time t; Lit = units of labour utilized by industry i at time t; α, β. represent the factor share coefficients, whereas λ Allows for factors changing the efficiency of the production process. We assumed that the technical efficiency of the production process is correlated with availability of credit, implying that the parameter A in the production function varies with credit access. Access to credit help boost the rate of technological innovation and hence output (Trew, 2006). In other words, credit constraints limit business expansion and can constrain production processes to economically inefficient scales.

However, this study is anchored on the Endogenous growth theory, otherwise known as the new growth theory to build the study. This theory focuses on developing economy including Nigeria and explains the intention of the study. The theory establishes that policy measures can have an effect on the long-run growth of the sector; while the growth is determined by variables within the model, which

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established relationship. All things being equal, the provision of credit by formal sources will go a long way to grow the sector. Hence, this model is theoretically in line with the study.